Question: Several years ago my broker at Morgan Stanley bought me a CD at 5% which would not come due until 2016. Unfortunately this CD was with Lehman Bros. . Now I'm worried about the $10,000 I have invested. It is still paying interest but don't know if it will continue. Should I sell or what? My broker refuses to answer my questions about this- I'm changing brokerage firms! Phyllis, Lacey, WA
Answer: One thing that I love about the questions we get is that I always learn something new. I had no idea there is a Lehman Brothers Bank FSB. There is, and it's headquartered in Wilmington, Delaware. It's essentially an online bank that also offers community banking services in Delaware. Here's the really critical piece of information: The bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC).
According to a Reuters story last month, the U.S. bankruptcy judge overseeing Lehman let the company hike the capital level of the bank. It needed to boost it capital levels to prevent the Office of Thrift Supervision from taking enforcement action and placing the bank under government receivership.
What does this mean for you? Your $10,000 invested in the certificate of deposit is safe since you are well under the $250,000 FDIC limit. (Although on January 1, 2010, the FDIC insurance limit returns to $100,000 for most deposit categories.) That should give you some reassurance. And that's my most important message.
The story gets more complicated after that. There is a risk that at some point the bank gets taken over by regulators. If that happens another bank would take over your account. The new owner may or may not honor the existing terms of the CD. Traditionally, banks did stick with the CD terms because they wanted to keep you as a happy customer. More recently, a number of banks, nervous about their deteriorating balance sheets, have decided to change the CD terms.
My guess is that you have what's called a "brokered" CD, i.e. one that was sold to you by your broker. Brokered CDs come with some unusual twists and turns. If you want to get out early in a brokered CD, you'll probably have to sell it in the market like any other fixed income security. The risk is that you'll sell your CD for less than you paid.
I would definitely get a new broker, and work with that person. In the meantime, your principal is safe.